Holden, SPC are just the start

Workers at Toyota’s Altona, Melbourne plant. Evidence to the Productivity Commission’s car industry inquiry said the minimum efficient size for a car factory is in the range of 200,000 to 300,000 vehicles a year and is increasing.
Photo: Reuters

A big part of the economic importance of the Abbott government’s decision to let Holden go was the message it sent.

Business, the government seemed to be saying, could no longer count on corporate welfare to protect managers and shareholders from the consequences of structural change, the vagaries of the market, or their own poor decisions.

That’s why the government’s answer to SPC Ardmona’s demands for assistance is important, even though the amount of money demanded from the federal and Victorian governments – $50 million – is much smaller.

SPC Ardmona’s main problems are the same as those confronting Holden: a change in consumer preferences and the appreciation of the Australian dollar. Obviously the government should not be protecting businesses from their customers, nor should they be protecting them against movements in the exchange rate.

AFR
AFR

The appreciation of the dollar has been driven mainly by high commodity prices and the expansion of the resources sector. But the structural change triggered by the resources boom must involve losers as well as winners. The rapid expansion of one sector puts pressure on other, weaker, parts of the economy and the car industry and SPC Ardmona were among the weakest.

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True, economists say the dollar is overvalued. But, to the extent that it is, the problem is temporary and a viable business should be able to get the support it needs from the capital market to weather the storm. SPC Ardmona’s problem seems to be that, like Holden, it is no longer viable, at least not in its present form.

In any case, it is not a problem that the government and the taxpayer should be trying to sort out.

The expansion of the resources sector will be at the expense of other parts of the economy. Australia’s interest is in ensuring that it is the weakest producers that are crowded out. The choice should be left to the market.

Sending a signal to business

The government’s decision on SPC Ardmona will either reinforce the message of the Holden decision, and tell the nation’s business managers to solve their own problems or pay the price of failure, or it will encourage them to believe that the Holden decision was a one-off and they can continue to sponge off the taxpayer.

Tony Abbott was right when he said no country has ever subsidised its way to prosperity. And you only have to look at the car industry to see why that is the case.

What did all the money poured into the car industry get us? The industry itself would say we got a major source of skill formation and innovation which inevitably spilled out over the rest of Australian manufacturing. That undoubtedly is true but, according to the dispassionate assessment of the Productivity Commission, these beneficial spillovers were no greater than from other large, high-tech industries that have better growth prospects than our invalid car makers.

The car industry now is virtually moribund because it is totally unsuited to the Australian economic environment. Australia is a small, high-income economy. The evidence to the Productivity Commission’s car industry inquiry was that the minimum efficient size for a car factory is in the range of 200,000 to 300,000 vehicles a year and is increasing. Toyota has announced plans to expand its Kentucky plant to produce more than 550,000 vehicles a year – well over twice Australia’s 2012 car production.

The only way the car industry could survive in Australia’s small market without government assistance is as a major exporter. But the industry finds itself competing against high-scale, low-wage producers for sales in the global market, and against Australia’s miners and the service industries and other, more successful manufacturers for labour and other scarce resources in the Australian market.

It is the success of these other industries that has made Australia a high-wage economy and, while the unions may have added to the problem, the fact is that car making in Australia will never be economically viable. There is no impending innovation, or green car technology, or global supply chain cluster, or any other industry department fairy dust that will change that.

Handouts won’t help

Government assistance at best prolongs the problem and usually makes it worse.

Historically, the competitiveness of the Australian car industry has been inversely related to the level of protection and assistance it received. Despite endless promises to raise their game, it was only when the Hawke and Keating governments started stripping away their protection that the car makers miraculously discovered they could produce world-class cars. Unfortunately, there was nothing that the Australian car manufacturers could do to protect themselves against the competitive pressures about to be unleashed by the industrial revolution in China and the other emerging market economies.

But as the local industry falls apart we see the featherbedding and poor investment decisions financed with government assistance.

Now Australia’s terms of trade are in decline and we must look to productivity growth to help keep living standards rising.

That extra productivity growth, economists tell us, will come only from the very competitive pressure that is crushing the life out of Holden and SPC Ardmona. Why? Because it is that competition that drives risky investment in the development of new products, new markets, and innovations in management, production, and distribution.

No one will make that kind of investment if they can solve their problems simply by lobbying for government assistance.

That’s what manufacturers routinely did before the Hawke and Keating government reforms, when business leaders were chosen more for their lobbying skills than their ability to innovate and win customers in a competitive market, and Australia was sliding down the scale of rich-country living standards.

The readiness of our business leaders to put their hands out now for corporate welfare shows how we could become like that again.

That’s the problem the Abbott government and the Australian people need to think about, because Holden and SPC Ardmona certainly won’t be the last victims of the forces of structural change now percolating through the economy.